ECON 206 Chapter 11
52) How banks suffered a decline in income advantages on uses of funds (assets) due to financial innovation?
Answer:
" "13) In a ________ banking system, commercial banks engage in securities underwriting. A) British-style universal B) German-style universal C) Japanese-style universal D) South American-style universal
Answer: A
" "14) Credit cards date back to ________. A) prior to the second World War B) just after the second World War C) the early 1950s D) the late 1950s
Answer: A
" "15) A firm issuing credit cards earns income from ________. A) loans it makes to credit card holders B) subsidies from the local governments C) payments made to it by manufacturers of the products sold in stores on credit card purchases D) sales of the card in foreign countries
Answer: A
" "2) Prior to the Bank Act Reform, the organizational structure of Canada's bank financial groups was the ________ model. A) bank-as-parent B) financial liberalization C) securitization D) British universal
Answer: A
" "2) The government institution that has responsibility for the amount of money and credit supplied in the economy as a whole is the ________. A) central bank B) commercial bank C) bank of settlement D) monetary fund
Answer: A
" "26) The development of money market mutual funds contributed to the growth of ________ since the money market mutual funds need to hold liquid, high-quality, short-terms assets. A) the commercial paper market B) the municipal bond market C) the corporate bond market D) the junk bond market
Answer: A
" "27) The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known as ________. A) securitization B) internationalization C) arbitrage D) program trading
Answer: A
" "3) Deposits in European banks denominated in dollars for the purpose of international transactions are known as ________. A) Eurodollars B) European Currency Units C) European Monetary Units D) International Monetary Units
Answer: A
" "32) Prior to 2008, bank managers in the U.S. looked on reserve requirements ________. A) as a tax on deposits B) as a subsidy on deposits C) as a subsidy on loans D) as a tax on loans
Answer: A
" "36) Money market mutual funds ________. A) function as interest-earning chequing accounts B) are legally deposits C) are subject to reserve requirements D) have an interest-rate ceiling
Answer: A
" "37) In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as ""breaking the buck."" This means that ________. A) they could no longer afford to redeem shares at the par value of $1 B) they required shareholders to contribute a dollar more in fees each month C) shareholders were able to redeem shares for more than a $1 D) shares earned more than a dollar in interest
Answer: A
" "38) In this type of arrangement, any balances above a certain amount in a corporation's chequing account at the end of the business day are ""removed"" and invested in overnight securities that pay the corporation interest. This innovation is referred to as a ________. A) sweep account B) share draft account C) removed-repo account D) stockman account
Answer: A
"1) Financial innovations occur because of financial institutions search for ________. A) profits B) fame C) stability D) recognition
Answer: A
" "3) The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from ________. A) issuing equity to finance bank expansion B) engaging in underwriting and dealing of corporate securities C) selling new issues of government securities D) purchasing any debt securities
Answer: B
" "4) The primary reason for the recent reduction in the number of financial institutions is ________. A) financial failures B) re-regulation of banking C) restrictions on branching D) financial consolidation
Answer: D
" "4) The main center of the Eurodollar market is ________. A) London B) Basel C) Paris D) New York
Answer: A
" "16) A major difference between the British-style and Japanese banking systems is that ________. A) British-style banks are allowed to hold substantial equity stakes in commercial firms, whereas Japanese banks cannot B) Japanese banks are allowed to hold substantial equity stakes in commercial firms, whereas British-style banks cannot C) bank holding companies are illegal in British-style banks D) Japanese banks are usually organized as bank holding companies
Answer: B
" "16) The entry of GM and Walmart into the credit card business is an indication of ________. A) government's efforts to deregulate the provision of financial services B) the rising profitability of credit card operations C) the reduction in costs of credit card operations since 1990 D) the sale of unprofitable operations by Bank of America and Citicorp
Answer: B
" "25) One factor contributing to the rapid growth of the commercial paper market since 1970 is ________. A) the fact that commercial paper has no default risk B) improved information technology making it easier to screen credit risks C) government regulation D) FDIC insurance for commercial paper
Answer: B
" "3) Currency circulated by banks that could be redeemed for gold was called ________. A) junk bonds B) banknotes C) gold bills D) state money
Answer: B
" "3) The most significant change in the economic environment that changed the demand for financial products in recent years has been ________. A) the aging of the baby-boomer generation B) the dramatic increase in the volatility of interest rates C) the dramatic increase in competition from foreign banks D) the deregulation of financial institutions
Answer: B
" "34) Prior to 1980, the Fed set an interest rate ________ that is a maximum limit on the interest rate that could be paid on time deposits. A) floor B) ceiling C) wall D) window
Answer: B
" "41) Financial innovation has caused ________. A) banks to suffer declines in their cost advantages in acquiring funds, although it has not caused a decline in income advantages B) banks to suffer a simultaneous decline of cost and income advantages C) banks to suffer declines in their income advantages in acquiring funds, although it has not caused a decline in cost advantages D) banks to achieve competitive advantages in both costs and income
Answer: B
" "45) Banks have attempted to maintain adequate profit levels by ________. A) making fewer riskier loans, such as commercial real estate loans B) pursuing new off-balance-sheet activities C) increasing reserve deposits at the Bank of Canada D) decreasing capital accounts
Answer: B
" "46) The decline in traditional banking internationally can be attributed to ________. A) increased regulation B) improved information technology C) increasing monopoly power of banks over depositors D) increased protection from competition
Answer: B
" "5) The ability to use one resource to provide different products and services is ________. A) economies of scale B) economies of scope C) diversification D) vertical integration
Answer: B
" "6) Reasons for holding Eurodollars include ________. A) the fact that Eurodollar deposits are insured by the FDIC B) the fact that dollars are widely used to conduct international transactions C) the fact that minimum transaction sizes are very low, making Eurodollars an attractive savings instrument for consumers D) the fact that Eurodollar deposits are heavily regulated
Answer: B
" "6) Rising interest-rate risk ________. A) increased the cost of financial innovation B) increased the demand for financial innovation C) reduced the cost of financial innovation D) reduced the demand for financial innovation
Answer: B
" "9) Banking consolidation in Canada will result in ________. A) an increased number of small banks B) an increase in bank size C) a reduction in bank size D) elimination of small banks
Answer: B
"1) The modern Canadian banking system began with ________. A) the Chartered Bank of Upper Canada in 1821 B) the Bank of Montreal in 1817 C) the Bank of Lower Canada in 1801 D) the Bank of New Brunswick in 1820
Answer: B
50) Explain why the profitability of traditional banking has declined and how banks have responded.
Answer: Banks have lost cost advantages because of disintermediation that resulted in innovations such as money market funds which competed for deposits, and reduced banks' deposit base. Banks responded with interest-paying chequing deposits that increased bank costs.
" 47) Why did the interest rate volatility of the 1970s spur financial innovation?
Answer: Banks were very vulnerable to interest-rate risk in the mortgage loans. To protect themselves, banks began to issue adjustable-rate mortgages whose interest rate will increase along with market interest rates. Additionally financial derivatives were developed to help hedge against interest-rate risk.
" "11) Bank consolidation will likely result in ________. A) less competition B) the elimination of credit unions C) more competition D) a shift in assets from larger banks to smaller banks
Answer: C
" "12) The most important source of the changes in supply conditions that stimulate financial innovation has been the ________. A) deregulation of financial institutions B) dramatic increase in the volatility of interest rates C) improvement in computer and telecommunications technology D) dramatic increase in competition from foreign banks
Answer: C
" "15) In a ________ banking system, commercial banks are allowed to hold equity stakes in commercial firms. A) British B) German C) Japanese D) North American
Answer: C
" "17) A debit card differs from a credit card in that ________. A) a debit card is a loan while for a credit card purchase, payment is made immediately B) a debit card is a long-term loan while a credit card is a short-term loan C) a credit card is a loan while for a debit card purchase, payment is made immediately D) a credit card is a long-term loan while a debit card is a short-term loan
Answer: C
" "18) Automated teller machines ________. A) are more costly to use than human tellers, so banks discourage their use by charging more for use of ATMs B) cost about the same to use as human tellers in banks, so banks discourage their use by charging more for use of ATMs C) cost less than human tellers, so banks may encourage their use by charging less for using ATMs D) cost nothing to use, so banks provide their services free of charge
Answer: C
" "19) The declining cost of computer technology has made ________ a reality. A) brick and mortar banking B) commercial banking C) virtual banking D) investment banking
Answer: C
" "2) What country is given credit for the birth of the Eurodollar market? A) The United States B) England C) The Soviet Union D) Japan
Answer: C
" "2) Which of the following are true statements? A) Schedule I banks have more powers than Schedule II banks. B) Widely held foreign banks can own 50 percent of a Canadian bank subsidiary. C) A Schedule II bank may have a significant shareholder (more than 10 percent) for up to 10 years after chartering. D) A Schedule III bank is a foreign bank is not allowed to branch directly into Canada.
Answer: C
" "29) The driving force behind the securitization of mortgages and automobile loans has been ________. A) the rising regulatory constraints on substitute financial instruments B) the desire of mortgage and auto lenders to exit this field of lending C) the improvement in computer technology D) the relaxation of regulatory restrictions on credit card operations
Answer: C
" "31) Loophole mining refers to financial innovation designed to ________. A) hide transactions from the CRA B) conceal transactions from the Bank of Canada C) get around regulations D) conceal transactions from the Department of Finance
Answer: C
" "35) The process in which people take their funds out of the banking system seeking higher-yielding securities is called ________. A) capital mobility B) loophole mining C) disintermediation D) deposit jumping
Answer: C
" "39) Sweep accounts which were created to avoid reserve requirements became possible because of a change in ________. A) demand conditions B) supply conditions C) government rules D) bank mergers
Answer: C
" "4) Which of the following are true statements? A) Schedule I banks have more powers than Schedule II banks. B) A Schedule II bank may enter the Canadian banking industry only as a Schedule II bank. C) A Schedule II bank may have a significant shareholder (more than 10 percent) for up to 10 years after chartering. D) A foreign bank may enter the Canadian banking industry only as a Schedule III bank.
Answer: C
" "5) The U.S. banking system is considered to be a dual system because ________. A) banks offer both chequing and savings accounts B) it actually includes both banks and thrift institutions C) it is regulated by both state and federal governments D) it was established before the Civil War, requiring separate regulatory bodies for the North and South
Answer: C
" "5) Uncertainty about interest-rate movements and returns is called ________. A) market potential B) interest-rate irregularities C) interest-rate risk D) financial creativity
Answer: C
" "6) Which bank became the government's fiscal agent in 1864? A) The Bank of Canada B) The Chartered Bank of Upper Canada C) The Bank of Montreal D) The US Treasury
Answer: C
" "7) Adjustable rate mortgages ________. A) protect households against higher mortgage payments when interest rates rise B) keep financial institutions' earnings high even when interest rates are falling C) benefit homeowners when interest rates are falling D) generally have higher initial interest rates than on conventional fixed-rate mortgages
Answer: C
" "7) Experts predict that the future structure of the banking industry will have ________. A) an increased number of banks B) as few as ten banks C) large, complex banking organizations D) many, small banking organizations
Answer: C
" "7) The Finance Act of 1914 required that ________. A) local banks be subject to the same regulations as national banks B) national banks establish branches in large cities C) the Department of Finance to act as a lender of last resort D) the Bank of Canada to act as a lender of last resort
Answer: C
" "8) Bank consolidation will likely result in ________. A) less competition B) the elimination of credit unions C) large, complex banking organizations D) a shift in assets from larger banks to smaller banks
Answer: C
"1) The separation of the banking and other financial services industries was known as ________. A) convergence B) consolidation C) the four-pillar approach D) underwriting
Answer: C
" "4) The regulatory system that permitted the organization of a bank by any group that met certain criteria is known as a ________. A) bilateral regulatory system B) tiered regulatory system C) two-tiered regulatory system D) free banking system
Answer: D
" "43) The experience of disintermediation in the banking industry illustrates that ________. A) more regulation of financial markets may avoid such problems in the future B) banks are unable to remain competitive with other financial intermediaries C) consumers no longer desire the services that banks provide D) markets invent alternatives to costly regulations
Answer: D
" "6) The business term for economies of scope is ________. A) economies of scale B) diversification C) cooperation D) synergies
Answer: D
"1) The Bank Act Reform took effect in ________. A) October 2001 B) January 2001 C) December 2001 D) May 2001
Answer: A
" "4) Credit unions are usually ________. A) more profitable than Schedule I banks B) regulated by the OSFI C) regulated by a central bank D) investors in mortgage loans
Answer: D
" 5) Describe the characteristics of cooperative banks: credit unions and caisses populaires.
Answer:
" "14) In a ________ banking system, commercial banks provide a full range of banking, securities, and insurance services, all within a single legal entity. A) universal B) severable C) barrier-free D) dividerless
Answer: A
" "2) Trust and mortgage loan companies are usually ________. A) operating under a charter issued by either the federal government or one of the provincial governments B) investors in commercial loans C) more profitable than chartered banks and credit unions and caisses populaires D) regulated and supervised by the TML
Answer: A
" "2) ________ is the process of researching and developing profitable new products and services by financial institutions. A) Financial engineering B) Financial manipulation C) Customer manipulation D) Customer engineering
Answer: A
" "22) So-called fallen angels differ from junk bonds in that ________. A) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously bonds that have had their credit ratings fall below Baa B) junk bonds refer to previously bonds that have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C
Answer: A
" "24) In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status. A) Michael Milken B) Roger Milliken C) Ivan Boskey D) Carl Ichan
Answer: A
" "3) One advantage of the holding company form of corporate ownership is that ________. A) it allows them to engage in other activities related to banking B) there is more regulation C) it demands less flexibility to achieve economies of scale D) it prevents strategic partnerships
Answer: A
" "4) In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and 5.5 percent; in the 1980s it fluctuated between ________ percent and ________ percent. A) 7; 20 B) 4; 11.5 C) 4; 18 D) 5; 10
Answer: A
" "40) Sweep accounts ________. A) have made reserve requirements nonbinding for many banks B) sweep funds out of deposit accounts into long-term securities C) enable banks to avoid paying interest to corporate customers D) reduce banks' assets
Answer: A
" "42) Disintermediation resulted from ________. A) interest rate ceilings combine with inflation-driven increases in interest rates B) elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits) C) increases in federal income taxes D) reserve requirements
Answer: A
" "44) One factor contributing to the decline in cost advantages that banks once had is the ________. A) decline in the importance of chequable deposits as part of a banks' source of funds B) decline in the importance of savings deposits as part of a banks' source of funds C) increase in the importance of chequable deposits as part of a banks' source of funds D) increase in the importance of savings deposits as part of a banks' source of funds
Answer: A
" "5) Eurodollars are ________. A) dollar-dominated deposits held in banks outside the United States B) deposits held by U.S. banks in Europe C) deposits held by U.S. banks in foreign countries D) dollar-dominated deposits held in U.S. banks by Europeans
Answer: A
" "5) The difference between a Schedule II and a Schedule III bank is that ________. A) a Schedule II bank is a Canadian subsidiary of a foreign bank B) a Schedule III bank is a foreign bank is not allowed to branch directly into Canada C) a foreign bank may enter the Canadian banking industry only as a Schedule III bank D) widely held foreign banks can own 50 percent of a Canadian bank subsidiary
Answer: A
" "7) During the 1970s and early 1980s, most of the sovereign lending was ________ leading to ________ consequences. A) unregulated; near disastrous B) regulated; near disastrous C) illegal; serious legal D) regulated; serious legal
Answer: A
" "8) Canadian banks have most of their foreign branches in ________. A) the U.S., Mexico, South America, Europe, and Asia B) Latin America, the Middle East, Mexico, and Europe C) Mexico, the Middle East, the Caribbean, and London D) South America, the Middle East, and the Caribbean
Answer: A
" "9) Foreign banks may enter the Canadian financial services industry ________ as a ________ bank(s). A) either; schedule II or III B) either; schedule I or II C) only as; schedule II D) only; schedule III
Answer: A
"1) The six largest chartered banks in Canada together hold ________ of the assets in the industry. A) over 90 percent B) nearly 75 percent C) just over 50 percent D) 25 percent
Answer: A
"1) The spectacular growth in international banking can be explained by ________. A) the rapid growth in international trade B) the 1988 Basel Agreement C) the desire for U.S. banks to escape burdensome domestic regulations D) the creation of the World Trade Organization
Answer: A
48) What are the adjustable-rate mortgages?
Answer: Adjustable-rate mortgages are mortgage loans on which the interest rate changes when a market interest rate (usually the treasury bill rate) changes.
" "10) Financial instruments whose payoffs are linked to previously issued securities are called ________. A) grandfathered bonds B) financial derivatives C) hedge securities D) reversible bonds
Answer: B
" "11) Both ________ and ________ were financial innovations that occurred because of interest rate risk volatility. A) adjustable-rate mortgages; commercial paper B) adjustable-rate mortgages; financial derivatives C) sweep accounts; financial derivatives D) sweep accounts; commercial paper
Answer: B
" "12) In a ________ banking system, commercial banks engage in securities underwriting, but legal subsidiaries conduct the different activities. Also, banking and insurance are not typically undertaken together in this system. A) universal B) British-style universal C) short-fence D) compartmentalized
Answer: B
" "13) New computer technology has ________. A) increased the cost of financial innovation B) increased the demand for financial innovation C) reduced the cost of financial innovation D) reduced the demand for financial innovation
Answer: C
" "3) Which of the following are true statements? A) Schedule I and Schedule II banks have different powers. B) Widely held foreign banks can own 50 percent of a Canadian bank subsidiary. C) Any widely held and regulated Canadian financial institution, other than a bank, may own 100 percent of a bank. D) Schedule I banks have the same powers than Schedule II banks.
Answer: C
" "30) According to Edward Kane, because the banking industry is one of the most ________ industries in America, it is an industry in which ________ is especially likely to occur. A) competitive; loophole mining B) competitive; innovation C) regulated; loophole mining D) regulated; innovation
Answer: C
" "8) The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price is ________. A) a put option B) a call option C) a futures contract D) a mortgage-backed security
Answer: C
" "9) An instrument developed to help investors and institutions hedge interest-rate risk is ________. A) a bond B) a sweep account C) a financial derivative D) a mortgage-backed security
Answer: C
"1) Near banks are defined as ________. A) banks, brokers, and credit unions and caisses populaires B) banks and trust and mortgage loan companies C) trust and mortgage loan companies, and credit unions and caisses populaires D) trust and mortgage loan companies, and brokers
Answer: C
" 17) What is the international experience on the separation of banking and other financial services industries throughout the world? What are the main frameworks ?
Answer: Canada and the U.S.: Not many other countries after the Great Depression followed them in separating the banking and other financial services industries. This separation was the most prominent difference between banking regulation in Canada and the U.S. versus the rest of the world.
" "10) As the banking system in Canada evolves, it is expected that ________. A) the number and importance of small banks will increase B) the number and importance of large banks will decrease C) small banks will grow at the expense of large banks D) the number and importance of large banks will increase
Answer: D
" "2) The four-pillars were identified as ________. A) banking, brokerage, trusts, and mutual funds B) banking, brokerage, credit unions, and mutual funds C) banking, brokerage, credit unions, and insurance D) banking, brokerage, trusts, and insurance
Answer: D
" "20) Bank customers perceive Internet banks as being ________. A) more secure than physical bank branches B) a better method for the purchase of long-term savings products C) better at keeping customer information private D) prone to many more technical problems
Answer: D
" "21) A disadvantage of virtual banks (clicks) is that ________. A) their hours are more limited than physical banks B) they are more secure than physical banks C) they are more costly to operate than physical banks D) customers worry about the security of on-line transactions
Answer: D
" "23) Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to as ________. A) municipal bonds B) Yankee bonds C) ""fallen angels"" D) junk bonds
Answer: D
" "28) ________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans. A) Diversification B) Arbitrage C) Computerization D) Securitization
Answer: D
" "3) An essential characteristic of credit unions is that ________. A) they are typically large B) branching is prohibited C) their lending is primarily for mortgage loans D) they are organized for individuals with a common bond
Answer: D
" "33) Prior to 2008, a U.S. bank's cost of holding reserves equaled ________. A) the interest paid on deposits times the amount of reserves B) the interest paid on deposits times the amount of deposits C) the interest earned on loans times the amount of loans D) the interest earned on loans times the amount on reserves
Answer: D
49) What important changes in banking have occurred as the result of low cost information technology? Discuss four examples of these changes.
Answer: Information technology lowers the cost of procession financial transactions making it profitable to create new financial services, and it makes it easier for firms to issue new securities.
51) What bonds are commonly called "junk bonds"? Why innovations in computer technology helped the "junk bonds" market?
Answer: Junk bonds are the bonds whose credit rating is below BBB. Before the advent of computers and advanced telecommunications, it was difficult to acquire information about the financial situation of firms that might want to sell securities. Because of the difficulty in screening out bad from good credit risks, the only firms that were able to sell bonds were very well-established corporations that had high credit ratings. Before the 1980s, then, only corporations that could issue bonds with ratings of BBB or above could raise funds by selling newly issued bonds. With the improvement in information technology in the 1970s, it became easier for investors to acquire financial information making it easier to screen out bad from good risks.
" 8) Explain how the dual banking system arose in the United States.
Answer: The modern US system because with all commercial banks being chartered by the state in which they operated. However lax banking laws led to bank failures. To eliminate the abuses that led to the failures, federally charged banks were created under the National Bank Act of 1863. As a result today, the US has dual banking system in which banks are supervised by either the state or the federal government.
" 10) Describe how was the Eurocurrencies market created.
Answer: The most important of the Eurocurrencies are Eurodollars and this market was fathered—ironically—by the Soviet Union. In the early 1950s during the height of the Cold War the Soviets fearing that the U.S. would freeze its substantial dollar balances held by banks in the United States, they moved the deposits to Europe so that they would be safe from expropriatation. They also wanted to keep the deposits in dollars so that they could be used in their international transactions. When they moved their dollars in Europe the Eurodollar was born.